In just one unforgettable week on Wall Street that ended on October 10, 2008, investors in the U.S. financial market lost an estimated $2.4 trillion as the Dow Jones Industrial Average plummeted by 18 percent. The world has spiraled into an economic crisis that former Federal Reserve Chairman Alan Greenspan describes as “the most wrenching [financial crisis] since the second world war.” The United States and most of the world still find themselves in the middle of a recession that shows little sign of significant change in the near future.

Investors’ palpable distrust in the financial markets can be traced back in many ways to the root of the current global financial crisis – corporate fraud through outright deception and by now well-known failures to disclose the truth to investors. In fact, Greenspan stated that financial institutions’ lack of integrity and the failure of Wall Street to behave honestly spawned the crisis. In a 2008 speech Greenspan said, “In a market system based on trust, reputation has a significant economic value. I am therefore distressed at how far we have let concerns for reputation slip in recent years.”

The world’s economies rely on market integrity and, in perhaps the largest part, rely on the U.S. market’s integrity. It has never been more apparent than it is today that reliable and truthful information, fair dealing and accountability are absolutely necessary and fundamental to that market integrity. As a result of the latest economic crisis, institutional investors have seen their funds’ investment portfolio values decline dramatically. Because market integrity relies on both governmental regulations and private regulation by injured shareholders, institutional investors now, more than ever, must step forward and hold accountable those responsible.

Shareholder Action

The investor-led securities class action mechanism is an established and effective means of addressing the U.S. financial market’s need for private regulation and accountability. Securities class actions are an indispensible element of maintaining market integrity. At a time like this, when massive, widespread fraud has upended the financial markets, class actions enable investors to not only help restore market integrity by holding wrongdoers accountable but also enable investors to recoup losses incurred due to securities fraud and initiate sorely needed corporate governance reforms. In fact, organizations around the world strongly advise that institutional investors and pension fund trustees – which all have fiduciary obligations to their funds’ participants and beneficiaries – ensures that their funds are participating in securities litigation, not missing out on recovering their rightful share of potential settlements and seeking important corporate governance reforms.

As the current global financial crisis vividly illustrates, corporate malfeasance and fraud did not end with Enron, enactment of the Sarbanes-Oxley Act or the stock-option-backdating scandal. As high-profile, investor-led securities class actions against companies like Enron, WorldCom and Tyco draw to a close, reaching record-setting settlements on behalf of investors, today’s financial crisis has exposed even more prevalent and widespread securities law violations across several industries. Many companies implemented fraudulent business practices aimed at increasing their own profits at the expense of investors while artificially inflating stock prices. Pervasive corporate corruption calls for shareholders to act.

U.S. regulators either cannot or do not investigate and prosecute all corporate malfeasance. The U.S. Supreme Court, however, has repeatedly stated that private, investor-led securities class actions provide “a most effective weapon in the enforcement of the securities laws.” The investor-led securities class action has emerged as a necessary legal mechanism designed to help regulate the market and hold violators accountable.

“When we have a recession like this, where so many people are hurting, it is a grim reminder to me that the work we are doing here is not just important, but absolutely necessary,” said David R. Scott, managing partner of the renowned securities class action law firm Scott+Scott LLP.

Class actions allow investors to “level the playing field” by aggregating these smaller injuries into one potentially large recovery and turning what was once an outmatched single investor into a class of investors with the means and motivation to litigate against highly resourceful and well-funded corporate defendants. With significantly increased dollar amounts at stake, companies are incentivized to address their internal controls to ensure compliance with securities laws, prevent future fraudulent practices and avoid potentially costly litigation – all of which are directed at restoring market integrity and investor confidence.

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